WTO Panel Rules US Tax Incentive to Boeing a Prohibited Subsidy

Photo source: Pixabay

Alicia Nicholls

In the latest saga of the on-going battle between aircraft giants Airbus and Boeing, a World Trade Organisation (WTO) dispute settlement body panel on November 28, 2016 has ruled that Washington State’s business and occupation (B&O) aerospace tax rate for the manufacturing or sale of commercial airplanes under Boeing’s 777X programme currently in development is a prohibited subsidy under the WTO’s Subsidies and Countervailing Measures (SCM) Agreement. The tax breaks to Boeing had been extended by Washington State in 2013 from 2024 to 2040.

The Dispute

The dispute DS487: United States — Conditional Tax Incentives for Large Civil Aircraft was brought by the European Union (EU) which claimed that seven tax incentives extended by Washington State to the civil aerospace industry, which would benefit Boeing’s 777x programme, constitute prohibited subsidies under Articles 3.1(b) and 3.2 of the WTO’s Subsidies & Countervailing Measures Agreement because they de jure require Boeing to use domestically assembled and not imported body and wings for its 777x jets.Such a measure would fall under a prohibited subsidy under Article 3.1(b) of the SCM Agreement as it is a subsidy tied to the use of local content. The EU had claimed that Boeing would gain over $5.7 billion in benefits from the measures.

Findings

The Panel found that all seven of the measures at issue were subsidies under Article 1 of the SCM but found that only the B&O aerospace tax rate for the manufacturing or sale of commercial airplanes under the 777X programme was a prohibited subsidy under the SCM Agreement as it was contingent on the use of domestic over imported goods.

The Panel recommended that the US withdraw this prohibited subsidy without delay and within 90 days.

With respect to the six other challenged measures, the Panel held that the EU did not demonstrate that the aerospace tax measures are de jure contingent upon the use of domestic over imported goods and were therefore not prohibited subsidies.

Reactions

Interestingly, both sides appear to have claimed victory which is perhaps not surprising as the WTO ruled only one out of the seven contested measures to be prohibited.

The European Commission has hailed the ruling a “major win” in its press release following the ruling. In that release EU Trade Commissioner, Cecilia Malmstrom is quoted as stating:

“Today’s WTO ruling is an important victory for the EU and its aircraft industry. The panel has found that the additional massive subsidies of USD 5.7 billion provided by Washington State to Boeing are strictly illegal. We expect the US to respect the rules, uphold fair competition, and withdraw these subsidies without any delay”.

Boeing’s rival, the EU-based Airbus termed it a “knock-out blow”. In its own press release, Airbus claimed that “Boeing has caused at least $95 billion in commercial harm to Airbus, opening the door to trade sanctions against the US in an equivalent amount.”

In its response to the ruling, Boeing stated that “the World Trade Organization (WTO) today rejected virtually all of the European Union’s challenges to the Washington state tax incentives”. Boeing’s General Counsel, J. Michael Luttig stated that “we fully expect Boeing to preserve every aspect of the Washington state incentives, including the 777X revenue tax rate.”

What next?

Either party can appeal the ruling and it is expected that this will occur. This dispute is just the latest in the 12-year old dispute between aerospace rivals Airbus and Boeing over the extent of “illegal” government support the manufacturers have received from EU member countries in the case of Airbus, and the US in the case of Boeing.

The ruling comes on the heels of a report by a WTO compliance panel released September 2016 which held that the EU had not complied fully with a ruling against support provided to Airbus in the EC and certain member States – Large Civil Aircraft dispute. In 2017 the WTO is also expected to issue its ruling on another case regarding US support for Boeing.

The full panel report may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

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